ACIT, CHENNAI V. Shri Chakra Finance & Credits (M) Pvt. Ltd., CHENNAI

ITA 999/CHNY/2010

• Counselvise Citation: [2011] 135 COUNSELVISE.COM (IT) 1070 (ITAT-CHENNAI)
• Duration Of Justice: 8 month(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 18-02-2011
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: B
• Assessment Year: 2005-2006
• Appeal Filed On: 18-06-2010
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: P B SEKARAN
• Assessee Lawyers: G BASKAR
• Keywords: Principle of natural justice

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL BENCH B, CHENNAI BEFORE SHRI U.B.S. BEDI, J.M. & SHRI ABRAHAM P. GEORGE, A.M. I.TA. NO. 999/MDS/2010 ASSESSMENT YEAR: 2005-06 THE ASSISTANT COMMISSIONER OF INCOME TAX, COMPANY CIRCLE VI(2), AAYAKAR BHAVAN, NEW BLOCK, 121, M.G. ROAD, 7 TH FLOOR, CHENNAI-34. VS. SHRI CHAKRA FINANCE & CREDITS (M) PVT. LTD., 25/2-1 G.A. ROAD, WASHERMANPET, CHENNAI 600 021. [PAN:AAFCS3715C] (APPELLANT) (RESPONDENT) REVENUE BY : SHRI P.B. SEKARAN ASSESSEE BY : SHRI G. BASKAR O R D E R PER U.B.S. BEDI, J.M. THIS APPEAL OF THE DEPARTMENT IS DI RECTED AGAINST THE ORDER PASSED BY THE LD. CIT(A) V, CHENNAI DAT ED 15.03.2010 RELEVANT TO TH E ASSESSMENT YEAR 2005- 06, WHEREBY DELETION OF ADDI TION MADE TOWARDS INTEREST ON NON-PERFORMING ASSETS (NPAS) HAS BEEN CHALLENGED. 2. FACTS INDICATE THAT THE ASSE SSEE COMPANY IS A NON-BANKING FINANCIAL COMPANY AS NOTIFIED BY THE RESERVE BANK OF INDIA. AS PER RBI PRUDENTIAL NORMS (RESERVE BANK) DIRECTIONS, 1998 (WITH EFFECT FROM 31 ST MARCH, 2003), THE COMPANIES ARE NOT ALLOWED TO PROVIDE INTEREST ON NON-PERFORMING ASSETS. THE RBI REGULATIONS ARE MANDATORY IN NATURE WITH A VIEW TO ARRI VE THE TRUE PROFIT OF THE COMPANY. THE ASSESSEE COMPANY IS FOLLO WING THE ABOVE SYSTEM OF ACCOUNTING CONSISTENTLY AND REGULARLY I.E. INCOME IS RECOGNIZED/ACCOUNTED ON RECEIPT BASIS AS FAR AS THE NPA IS CONCERNED. THE ASSESSEE COMPANY HAS GIVEN LOAN TO 13 PARTIES AMOUNTING TO ` 44,57,979/- WHICH HAVE BECO ME NON PERFORMING ASSETS FOR ITA NO. 999/MDS/10 2 THE YEAR UNDER CONSIDERATI ON AND THE LOANS ARE UNSECURED. IN OTHER WORDS, THE COMPANY HAS NO COLLATERAL SECURITIES IN THE FORM OF IMMOVABLE LAND & BUILDING/ MOVABLES. HENCE THE POSSIBILITY OF RECOVERY IS DOUBTFUL. HENCE, ADDITION TO THIS EXTENT WAS MADE AND ON APPEAL, IT WAS SUBMITTED THAT THE MAIN ISSUE RELATES TO NON-ADMISSION OF INTEREST INCO ME FROM THE AMOUNT OF LOAN GIVEN TO THE PARTIES. THE ASSESSING OFFICER HAS DETERMINED THE ACCRUED INTEREST ON THE NON PERFORMING ASSETS AMOUNT TO ` .9,84,213/- BASED ON THE INTEREST RATE APPLICABLE DURING THE FINANCIAL YEAR 2004-2005. THE ASSESSING OFFICE R HAS POINTED OUT THAT THE ASSESSEE COMPANY OUGHT TO HAVE FOLL OWED MERCANTILE SYSTEM OF ACCOUNTING AND THE BOOKS OF ACCOUNTS HAVE TO BE KEPT AS PER SECTION 209 OF THE COMPANIES ACT. IT WAS FURTHER ARGUED BEFORE THE FIRST APPELLATE AUTHORITY THAT THE ASSESSEE COMPANY IS A NON BANKING FINANCIAL COMPANY NOTIFIED BY RESERVE BANK OF INDIA DESERVES CERTAIN SPECIAL PRIVILEGES IN FOLLOWING THE SYSTEM OF ADMITTING THE INTEREST INCOME ON NON PERFORMING ASSETS. THESE TYPES OF NBFCS ARE GOVERNED BY RBI PRUDENTIAL NORMS 1998 WHICH WILL GIVE CLEAR PICTURE OF TR UE PROFITS EARNED AND THE TAX SHALL BE CALCULATED ON THE REAL INCOME. HE FURTHER ARGUED THAT IN RESPECT OF THE RECEIPT BASIS OF ACCOUNTING EVEN IT PERTAINS TO PRIOR PERIOD. HENCE THE INTEREST INCOME ON NON PERFORMING ASSETS ARE ADMITTED ON RECEIPTS BASIS AND NO PORTION OF INCOME IS LEFT OUT AND T HE INCOME IS TAXED AS AND WHEN IT IS RECEIVED. HE RELIED UPON HONBLE MADRAS HIGH COURTS DECISION IN THE CASE OF M/S. SAKTHI FINANCE LTD. VS. CIT, WHICH WAS DECIDED IN FAVOUR OF THE ASSESSEE ON THE GROUND THAT THE OV ERDUE INTEREST INCOME ARE TO BE TAXED AT THE TIME OF ITA NO. 999/MDS/10 3 REALIZATION FOLLOWING THE R EALIZATION CONCEPT. THE HIGH COURT HAS DECIDED THIS CASE ON THE BASIS OF EQUALITY AND IN THE PR INCIPLES OF NATURAL JUSTICE ALSO. 3. THE LD. CIT(A) WHILE CONSIDERING AND ACCEPTING THE PLEA OF THE ASSESSEE HAS DECIDED THE ISSUE IN FA VOUR OF THE ASSESSEE AS PER PARA 21.5, WHICH READS AS UNDER: 21.5 I HAVE CONSIDERED THE SUBMISSIONS CAREFULLY AND I HOLD THAT THE ACCRUED INTEREST INCOME ON NON PERFORMING ASSETS (UNSECURED, BAD AND DOUBTFUL LOANS) NEED NOT BE TAXED IN THE YEAR UNDER CONSIDERATION AS IT DESERVES SPEC IAL ACCOUNTING TREATMENTS AS PER RBI PRUDENTIAL NORMS APPLICABLE TO BANKING COMPANIES WHICH ARE ALSO EQUAL APPLICABLE TO NBFCS. THIS ISSUE IS DECIDED IN FAVOUR OF THE APPELLANT. 4. AGGRIEVED BY THIS OR DER OF THE LD. CIT(A), THE DEPARTMENT HAS COME UP IN APPEAL AND IT WAS ARGUED THAT T HE LD. CIT(A) HAS FAILED TO APPRECIATE THAT SECTION 43D, WHICH LAYS DOWN THAT ONLY PUBLIC FI NANCIAL INSTITUTIONS , SCHEDULED BANKS, STATE FINANCIAL CORPORATIONS, STATE INDUSTR IAL CORPORATIONS AND PUBLIC COMPANIES ENGAGED IN LONG TERM FINANCING FOR RESIDENTIAL PR OJECTS CAN OFFER THEIR INCOME ONLY WHEN THEY CREDIT THEIR ACCOUNT WITH INTERE ST ON STICKY LOANS OR ON RECEIPT BASIS, WHICHEVER IS EARLIER WHICH IS NOT APPLICAB LE TO THE ASSESSEE. FURTHER, THE LD. CIT(A) OUGHT TO HAVE FOLLOWED THE DECISIONS OF THE HONBLE SUPREME COURT IN THE CASE OF KERALA FINANCIAL CORPORATION 210 ITR 129 AND IN THE CASE OF SOUTHERN TECHNOLOGIES 320 ITR 577, WHEREIN IT WAS HELD THAT THE DIRECTIONS OF THE RBI HAVE NOTHING TO DO WITH COMPUTATION OF TA XABLE INCOME. THAT APART, THE LD. DR FURTHER CONTENDED THAT THIS TRIBUNAL IN I.T.A. NO.13&72/MDS/2002 IN THE CASE OF M/S. SHRIRAM CITY UNION FINANCE LTD. OBSERV ED THAT IN VIEW OF THE DECISION OF THE HONBLE MADRAS HIGH COURT IN THE CASE OF T.N. POWER FINANCE (SUPRA) IF A ITA NO. 999/MDS/10 4 PARTICULAR ASSET HAS BECOME NON-PERFORMING EVEN THEN RIGHT TO RECEIVE INTEREST WILL ACCRUE TO THE ASSESSEE AND IF SUCH INTEREST HAS NOT BEEN RECOGNIZED MERELY BECAUSE OF RBI GUIDELINES, THEN SUCH INTEREST HAS TO BE SUBJECTED TO CHARGE OF INCOME TAX. IT WAS THUS PRAYED FOR SETTI NG ASIDE THE ORDER OF THE LD. CIT(A) AND RESTORING THAT OF THE ASSESSING OFFICER. 5. THE LD. COUNSEL FOR THE ASSESSEE WH ILE RELYING UPON THE ORDER OF THE LD. CIT(A) HAS PLEADED FOR CONFIRMATION OF THE IMPUGNED ORDER AS ISSUE IS SQUARELY COVERED BY VARIOUS DECISIONS OF CHENNAI BENCHES OF ITAT IN FAVOUR OF THE ASSESSEE, THEREFORE, THERE IS NO AMBIGUITY OR FLAW IN THE ORDER OF THE LD. CIT(A), WHO HAS FOLLOWED HONBLE MADRAS HIGH COURT DECISION IN THE CASE OF M/S. SAKTHI FINANCE LTD. V. CIT IN TC NO. 311 OF 2001, WHICH WAS DECIDED ON THE GROUND THAT OVERDUE INTEREST INCOME ARE TO BE TAXED AT THE TIME OF REA LIZATION FOLLOWING THE REALIZATION CONCEPT WHILE DECI DING THE CASE ON THE BASI S OF EQUALITY AND PRINCIPLES OF NATURAL JUSTICE, IT WAS THUS ARG UED FOR CONFIRMATION OF THE IMPUGNED ORDER. 6. WE HAVE HEARD RIVAL SIDES, CONSIDERED THE MATERIAL ON RE CORD AS WELL AS CASE LAW CITED BY RIVAL SIDES, DISCUSSED AND APPLIED BY THE LD. CIT(A) IN DECIDING THE ISSUE. IT IS NOT IN DISPUTE THAT THE ASSESSEE HAS NOT RECEIVED ANY INTEREST ON THE NON-PERFORMING ASSETS DURING THE YEAR UNDER CONSIDERATION AND THE LD. DR EXCEPT RELYING UPON THE DECISION IN WHICH IT HAS BEEN HELD THAT DIRECTIONS OF THE RBI HAVE NOTHING TO DO WITH COMPUTATION OF TAXABLE INCOME, BUT IN SIMILAR TYPE OF OTHER CASES, THIS BENCH OF THE TRIBUNA L HAS TAKEN A VIEW IN FAVOUR OF THE ASSESSEE INCLUDING THAT OF THE M/S. SAKTHI FINANCE IN I.T.A. NOS. 1646- ITA NO. 999/MDS/10 5 1648/MDS/2010 VIDE ORDER PRONOUNC ED ON 16.12.2010 AND RELE VANT PORTION OF THE ORDER IS REPRODUCED AS UNDER: 4. WE HAVE PERUSED THE ORDERS AN D HEARD THE RIVAL CONTENTIONS. WE FIND THAT THE ISSUE IS SQUARELY COVE RED IN FAVOUR OF ASSESSEE BY THE DECISION OF JURISDICTIONAL HIGH COUR T IN ASSESSEES OWN CASE REPORTED IN 293 ITR 357. IT WAS HELD BY HON'BLE JURISDICTIONA L HIGH COURT THAT INTEREST ON NON-PERFORMING ASSETS WAS TO BE CONSID ERED ONLY AFTER RECOGNIZING THE INCOME FROM SUCH ASSE TS. IN ADDITION TO THAT WE ALSO FIND THAT HON'BLE DELHI HIGH COURT IN THE CASE OF CIT V. M/S VASISTH CHAY VYAPAR LTD. IN ITA 552/2005, ITA 565/2005, ITA 1191/2007, ITA 139/2008, ITA 466/2008, ITA 537/2008 AND ITA 408/2003 DATED 29 TH NOVEMBER, 2010 AFTER REFERRING TO THE DECISION OF HON'BLE APEX COURT IN THE CASE OF SOUTHERN TE CHNOLOGIES (SUPRA) AS WELL THAT OF HON'BLE JURISDICTIONAL HIGH COURT IN THE CASE OF ELGI FINANCE LTD. (SUPRA) HELD THAT INTEREST ON NO N-PERFORMING ASSETS COULD NOT BE CONSIDERED AS INCOME ON ACCRUAL BASIS. WE, THEREFORE, FIND NO MERITS IN THE APPEAL FILED BY THE REVENUE. 7. CONSIDERING THAT FACTS ARE IDENTICAL AND ISSUE IS SIMILAR IN THIS CASE AND PRECEDENT RELIED UPON, THEREF ORE, FOLLOWING THE SAID DEC ISION WE UPHOLD THE ORDER OF THE LD. CIT(A) AND DISMISS THE APPEAL OF THE DEPARTMENT. 8. IN THE RESULT, THE APPEAL OF THE DEPARTMENT IS DISMISSED. ORDER PRONOUNCED ON 18.02.2011. SD/- SD/- (ABRAHAM P. GEORGE) ACCOUNTANT MEMBER (U.B.S. BEDI) JUDICIAL MEMBER CHENNAI, DATED, THE 18.02.2011. VM/- COPY TO : APPELLANT/RES PONDENT/CIT(A)- /CIT, /DR